Category Archives: Financial Foresight & Longevity

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When pension plans were devised (such as CPP in the 1960’s), the assumption was that people would contribute to the plans over their working lives and at retirement, they would have pensions (partly funded by investment growth) to replace part of their income. Yet no one back then could foresee that investment returns would stagnate, or that many people would retire early and with the end of mandatory retirement, pension plans would be under stress and retirees would live much longer than predicted.

Most Canadians hope that their pensions will pay for at least basic living expenses. But most people expect to pay for extras and want-to-haves as well. The problem is, not all pensions are created equal.

The pension plans for government employees are generally Defined Benefit plans, which guarantee a certain level of income based on such factors as years of service, income level achieved and so on. Private sector employees generally have Defined Contribution plans, or group RRSPs; where the benefits paid out depend upon the investment performance of the contributions made to the plan. The Defined Benefit plans offered by governments are efficient because of their size and professional management — management which is usually less expensive than what private sponsors or individuals must pay. Between the DB and DC pension plans, there is no level playing field.

The Canadian Federation of Independent Business estimates that to achieve a pension covering 70% of working income at retirement, public sector workers contribute about 7% of their salary. To achieve the same coverage, private sector workers would have to contribute up to 21% of their salary. In addition, public sector pension plans are routinely “topped up” by governments, with the funds coming from taxpayers. Often, companies cannot do such “top ups” except over a longer time frame.

Most government-employee plans are mandatory; often, private employer plan participation is optional. The result is that many non-government employees are leaving work with non-existent or inadequate pensions.

Fairness is an issue between public pension plans and private sector plans. Critics point out that “improved” pensions for private sector employees will have costs, which public pension-holders will not have to bear. A thorough revamping of rules for both public and private pensions is needed to close this great divide.

Commentary and Book Review of The Third Rail by Jim Leech and Jacquie McNish (2013).

Pension plans exist for three basic reasons.Firstly, pensions ensure an on-going source of incomefor people who no longer earn income from employment.Secondly, pensions provide an income based on a person’s pre-retirement level of income. Thirdly, for those who have had very little income during their working lives, or who have been unable to work, pensions of various types sustain them for the rest of their lives. There is therefore an element of “fairness” in pensions.

Jim Leech, former CEO of the Ontario Teachers’ Pension Plan, and business journalist Jacquie McNish, have written “The Third Rail”, Confronting our Pension Failures.It should be required reading for every Canadian (and Canadian politicians).Given the pension disaster which looms for Canadians, younger citizens – the `spectator` generation in particular, should be reading thisbook and becoming outraged activists.If they don’t, they will be saddled with impossibly high taxes to sustain the unrealistic pension promises made to the huge Boomer Generation.They will also see education and health services for their children undercut by Boomer demands.

The book examines three important case studies. The pension crises of New Brunswick, Rhode Island and The Netherlands, show why and how unsustainable pension plans MUST and CAN be re-worked. The achievable objective is to give pensioners reasonable financial security without bankrupting younger taxpayers.

Pensions are a battleground where private interests and the public interest intersect.

The private interest is essentially the business community which does not want to incur what it considers expensive, uncertain costs to doing business. Individual citizens may also object to giving a “free pass” to those who have saved nothing for their own retirement.

The public interest is society’s desire to help by providing an underpinning of security for those who have worked all their lives. We also want to ensure that those less fortunate can age with dignity and a reasonable amount of disposable income to meet their expenses.